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Corporation tax reform - good news for SMEs?

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Thursday December 2, 2010 at 6:02pm

The corporation tax road map revealed by George Osborne on 30th November 2010 reveals government plans to reform corporation tax over the next 5 years. Plans include lowering the corporation tax from 28% current to 24% by 2014 and changes to the controlled foreign company tax regime, as well as a drop in the corporate tax rate for patents in a bid to encourage companies into the UK.

The principles of the reform proposed reform of corporation tax seem sound, but how will it all play out in practice?

Principles of corporation tax reform - It is the Government’s view that in general a low corporate tax rate with fewer reliefs and allowances will provide the best incentive for business investment with the fewest distortions.

Lowering rates while maintaing the tax base

Our view: We are all for lower tax rates and simplicity – but as they say the devil is often in the detail. Let’s see which reliefs and allowances are removed and whether the lower corporate tax rate really benefits SMEs.

Maintaining stability – A stable tax system is vital to business. The Government will avoid unnecessary changes to tax legislation. In bringing forward reform, the Government will work with business to ensure that any changes improve the sustainability and long-term stability of the corporate tax system.

Our view: Stability, we like. But how long will this coalition last? And what happens if there’s a change of Government and therefore changes in policy next time around?

Being aligned with modern business practice – The way businesses operate changes over time, and with globalisation and technological development the pace of change over the last 20 years has accelerated. The tax system needs to keep pace with these developments and not stifle adaptation or create perverse incentives for business.

Our view: Clearly a play to keep the multinationals in the UK and prevent them diverting profits overseas. Not really much in this for SMEs.

Avoiding complexity – The Government considers simplicity to be a feature of good tax policy. However, complexity in how businesses operate and the diversity of the business population will mean some complexity in the corporate tax system is unavoidable. In bringing forward reforms, the Government will seek to avoid complexity where it can.

Our view: Ha, ha. ‘Complexity is how businesses operate’ – err, no, it’s how businesses have to operate because of the tax and legal system. Businesses and business people favour simplicity, always when it comes to tax.

Maintaining a level playing field for taxpayers – The tax system should be fair across corporate tax payers without distorting commercial decisions. This can support a limited number of special allowances and reliefs, for example where there are market failures.

For insomniacs amongst you the full HM Treasury report on Corporate Tax Reform is available to download from their website.

What’s your view on these Reforms? What do they do for your business?

Andy Parker
Chartered Accountant

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